Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR

Question

Assume that the Rome Electricity Company (REC) wishes to create a sponsored ADR program worth $290 million to trade its shares on the New York Stock Exchange. Also assume that REC is currently selling on the Borsa Italiana (the Italian Stock Exchange, in Milan) for €30 per share and that the current dollar/euro exchange rate is $1.25/€. American Bank and Trust (ABT) is handling the ADR issue for REC and has advised REC that the ideal trading price for utility company shares on the NYSE is about $75 per share (or per ADR).

A. Assume that REC's stock price rises from €30 to €35 per share. If the exchange rate does not also change, what will happen to REC's ADR price? $

B. If the euro appreciates from $1.25/€ to $1.29/€ but the price of REC's shares remains unchanged in euros, what will happen to REC's ADR price?

Explanation / Answer

A)

Domestic market price = €30 per share

Expected domestic price per ADR = €30 per share * $1.25/€ = $37.5 per share

Number of ADR to be issued = $290 million / $37.5 = 7.7333 Million

If price rises from  €30 to €35 per share, then REC's ADR price = €35 per share * $1.25/€ = $43.75 per share

B)  If the euro appreciates from $1.25/€ to $1.29/€ but the price of REC's shares remains unchanged in euros,then REC's ADR price =  €30 per share * $1.29/€ = $38.7 per share

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